How to hire a financial planner

BOSTON (MarketWatch) — I have given countless talks over the past 15 years to groups of people interested in hiring financial advisers or working better with the helpers they have, and I typically poll my audience to learn about their experiences.

I ask that people who are working with an adviser — or who have had one they stopped using — raise their hands. Then I ask them to keep them up if they hired the first financial adviser they met with or if they hired someone recommended by family or friends. Virtually all hands stay up.

Next, I ask them to keep their hands up if they did a background check on the adviser and talked to an independent reference before they agreed to work together. I have never had a single hand stay in the air.

Plenty of people do everything wrong in the hiring process and wind up happy with the outcome. But you should still try to avoid the common mistakes. If you do, your chances of living happily ever after — or at least until the adviser retires and you have to hire a replacement — are infinitely higher than if you leave it up to fate to bring you someone you can work with.

Big mistake No. 1: Interviewing just one candidate

You have come to a point in your life where you know you need help. Emotionally, that makes you like a man dying of thirst, unable to tell a mirage from reality and willing to drink sand if he can be convinced it will make him feel better.

The first adviser you meet could be a complete idiot, but almost certainly will sound great to you. That’s because his spiel makes it sound like he can solve your problems, and you lack the know-how to tell if he can’t and the comparison to any other adviser to establish how you truly feel about him. You have no clue if he is selling you a bill of goods, a one-size-fits-all plan that maximizes his take and minimizes your service, or if he truly is a cut above the other helpers in your area.

Another reason why investors hire the first person they meet is that they got the adviser’s name from a friend or relative whom they trust. That colors their judgment, because of the way they feel about the person making the referral, or the way they envision this adviser helping them live the lifestyle they see their friend or relative enjoying.

Years ago, a leading financial planner in Boston told me her life was so busy with books and her radio show that she had stopped taking on new clients, and that when people inquired about her services she gave them the names of two young “up-and-coming financial planners” in the area. Alas, she had never worked with these men, had done no background checks, and had simply picked them because they were “bright, energetic, and asked good questions at the [Certified Financial Planners] group meetings.” I’m sure the people she referred to them took her word as gospel; four years later, one of those advisers was under indictment for fraud.

Big mistake No. 2: No background or reference check

“He’s got a fancy office, drives a nice car, and has a lot of rich clients,” is not a background check; it’s a fitting description of almost every financial adviser charged with fraud in the United States over the past two decades.

Your retirement nest egg, college savings, and more are the biggest, most important assets you will ever accumulate and try to grow, and yet most people spend more time trying to figure out which vacuum cleaner or microwave oven is the best value for their money than they do trying to determine if an adviser is safe to work with.

Moreover, they rely on shallow logic as a reason to avoid a few phone calls or a search online. The adviser is on the radio, so he must be good. He’s been quoted in the newspaper by that columnist I like, so he’s qualified. He works with someone I know, and she has a nice house.

Now I’ll let you in on a few secrets that may change your opinion of the advisers you see in the media.

For starters, most journalists will call anyone to be a source when they are on deadline. They haven’t done background checks or vetted the so-called expert; they just got someone who seemed right, and who could talk about the subject at hand.

The radio fallacy is another good one. Most financial advisers on the radio have paid for the time, meaning they bought their own show to use as a personal advertising vehicle. The information they give may be fine and dandy, but the radio station didn’t check their credentials or make sure they’re solid advisers; it simply cashed their check and gave them access to the airwaves.

Background checks can’t protect you completely. In 2007, I ran an adviser named Gregg Rennie of Quincy, Mass., through the full test and found everything on the up-and-up; Rennie was becoming a primary sponsor for my radio show, and I wanted to know if he was bad news. Alas, at some point over the next few months, Rennie’s personal financial picture changed, and he wound up selling fraudulent investments, basically starting down the road of a Ponzi scheme in order to stay afloat himself, according to the Securities and Exchange Commission.

Big mistake No. 3: Focusing the search on cost or payment style

Cost is an object, but it’s not THE object.

The same goes for payment style, the various methods of working and compensating an adviser discussed in the last chapter.

Cheap advice is, well, cheaper, but not necessarily better, appropriate, or the elusive “right for you.” If you save a few hundred dollars in fees to the adviser, but wind up with someone who is incompetent and whose decisions cost you thousands of dollars down the line, you did not get a bargain. Likewise, if you go for more expensive counsel but can’t get the quality of service you desire, you’ll be unhappy no matter how respected the adviser and how sound his advice.

Look at what you are getting for your money and determine a reasonable balance between services, costs, and method of compensation.

If all you are looking to do is add a mutual fund or two that you can throw some money into every month and hold for years, you shouldn’t be paying a big fat fee for an overall asset-allocation plan. But if you require a needs analysis and a plan of action to get you from where you are now to your financial goals, you don’t necessarily want to make your lifetime decision based on “I hate paying commissions” or “This planner charges less by the hour.”

Big mistake No. 4: Expecting credentials to make an adviser ‘good’

There are so many professional credentials and designations out there for financial advisers that you could drown in a sea of alphabet soup.

That said, every credential is different. Some are worthwhile, some are bogus. Within every credential, there are advisers who are good, and others who stink.

The real question about credentials boils down to “Does this adviser have the expertise I need?”

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